Municipal Leasing, Ambulance Financing, Fire Truck Financing

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Comparing lease purchase financing proposals from the Lessee's point of view.

In response to your request for lease purchase financing proposals, perhaps you received responses that vary considerably in terms of payments, commencement dates, and other assumptions.

In trying to determine the best alternative that fits your needs, it is important that you, the Lessee, be able to compare the proposals presented to you on an ' apples to apples ' basis.

1. Are lease interest rate commencement dates are the same in all proposals.

If competing proposals do not use the same interest rate accrual commencement date, their actual effective costs will differ, making it difficult to compare alternatives on an equal basis.

Also, if a proposal uses an 'assumed date', or the date of the proposal, to begin the interest accrual, the rate presented in the proposal can be lower than others that do not use this methodology, however the true interest cost will be a higher and unknown rate to you since it will depend on when the lease is funded, or the equipment vendor paid.

Interest accrual commencement and the booking date ( the payment to the vendor) are the same:
Equipment cost is $500,000:
A lessor fee of $4,000 is incorporated in the financing
The lease term is for 5 annual in advance payments beginning on the vendor payment funding date.

In this scenario, using a stated interest rate of 5.5% in the proposal to amortize the lease, annual payments would be $111,871.97.

Lease # 2

Interest accrual starts on the date of the proposal, and the lease will book or be funded 30 days later:
Equipment cost, payment amounts and dates, and lease term are the same as in Lease # 1:
Due to the earlier interest accrual date, the proposal could indicate an interest rate of 5.25% ( 0.25% less than Lease # 1 ) due to the longer interest accrual period, which would seem less expensive, but the true interest cost would still be the 5.50% based on the day the vendor was paid.

By pushing the assumptions a bit further, and using the proposal date ( 30 days prior to equipment delivery and acceptance) as an interest commencement date (as in Lease # 2) plus delaying the vendor payment after the lessee's equipment acceptance for an additional 30 days, an interest rate of 5.03% ( 0.47% less than Lease # 1 ) could be used in a proposal to win the business, but the 5.50% true interest cost would still apply to the financing, again based on when the equipment vendor was paid.

Consequently, the longer the time period between the interest accrual commencement date and the true funding date of the lease, the higher the actual interest rate will be over an 'assumed date' or proposal date interest rate indicated in a proposal.

Also purchase option values in such a lease will be higher than a true amortization due to the differential between a stated proposal rate and the actual effective rate in the financing.

By accelerating lease payment dates, whereby payments start earlier in the contract period, the payments in such a proposal will amortize the outstanding financed principal faster, resulting in lower lease payments ( assuming equal interest rates ) over a proposal that does not use that technique or assumption.

Similarly, a higher effective interest rate can be hidden vis a vis a competing proposal with later payment dates, that may in fact be based on what was requested in your RFP.

3. Are termination values for the lease, or purchase options, presented on a straight amortization basis, and not subject to a hidden lease interest rate differential which will increase the buy out values over a simple amortization.

FMLC leases capitalize its lessor and other fees, and amortize that cost and the funding amount over the life of the lease on a no prepayment penalty basis, unless we indicate otherwise.

4. Are all fees associated with the various proposals and financing alternatives included in the lease proposal numbers provided to you.

FMLC proposal Exhibits incorporate all required lessor fees, and there are no additional charges payable to the lessor, or the funding bank unless specifically set forth.

A Lessee's own legal counsel expenses in completing the lease would not be incorporated, since those are ordinarily not paid out of the financing proceeds unless specifically requested by the Lessee and approved by the lessor.

5. Is applicable sales tax left out, or included, uniformly in all proposals.

This is of particular importance if you are comparing proposals provided as part of a vendor's equipment pricing proposal, versus a third party proposal, such as one from FMLC.

If one vendor leaves tax out, and another includes tax in the equipment price, and a third party financing proposal is not presented on the same basis, the equipment value used in the various financing proposals will not be comparable. Also the lease payments presented on those differing figures will not reflect the true costs that will develop as the lease is completed and funded.

6. Does the booking or commencement date for a lease ( and consequently the interest rate accrual commencement date ) match the date your equipment vendor is going to be paid for the purchased and financed equipment.

In general, the equipment delivery and acceptance date, and the lease commencement date, should be the same.

Delaying vendor payments after a lease commencement date for even minor periods will result in a significant increase in the true cost of the lease financing to you. This effect was shown in the Lease # 3 exhibit in item 1 above.

This is due to the fact that with such a delay, the true amortization period of the lease has been shortened, and by using such a maneuver, a potential lessor is in effect charging you for interest on funds that have not been disbursed to a vendor, possibly in violation of your purchase contract with that vendor.

FMLC leases are structured to have interest accrual commence on the date funds are to be wire transferred to your vendor, unless multiple payments or other circumstances prevent it. FMLC does not use delayed vendor payments to increase lease yield and as indicated, attempts to have the interest accrual and vendor payment occur on the same date.

All of these issues will directly relate to the true cost of the lease used to finance your equipment purchase.

While it may seem difficult to reconcile differing proposal alternatives, it is in your interest to have financing proposals detail the various assumptions incorporated in them, or for you to request proposal revisions, to make the desired comparison easier for you.

After all, it is your budget that will feel the effect of these structuring differences for several years to come.

Please call if we can be of assistance to you in understanding any of these issues that directly relate to your making an informed decision.

We would also appreciate your feedback on whether this explanation was of use to you, and what other information you would find helpful in the presentation.